In the last post, I went over how to find Forex trading strategies to test. Most of the time, inexperienced traders just jump in and start trading a strategy they just learned with real money. Big mistake!
Here is what you should to next:
Test it until it is obvious…
Now that you have learned a strategy (or invented one), it is now time to test it. This is where people usually get tripped out. Remember that little thing called work that I was talking about before?
Whoomp, here it is.
But this is what separates the tadpoles from the frogs. A lot of people want to be rockstars (literally), but how many of them want to do what is necessary to become a professional musician? Very, very few.
If you have got this far in this post, you are probably willing to put in the time and effort to make it happen.
Even so, this may seem a little intimidating, so stick around to the end of this post to learn how to join a community that will help you do this for free…
So what do you need?
Forex backtesting software.
There are a few different ones out there, so take a few minutes and see which one is right for you. I personally use Forex Tester, but there are other solutions like Ninja Trader and Tradestation. Some brokers even provide ways to backtest, so look around.
It will probably cost some money, so be prepared. But seriously, how much money is that compared to a college education, or even a couple of continuing education classes? It is really affordable.
Also, make sure that you can cheaply get data from at least 10 years back, so you can get a good feel for if a trading strategy will work or not.
Why do you need to do this? Here is a video that illustrates exactly why…
If you don't know where to begin, check out my free Strategy Development Course. It will give you a step-by-step on what to do and is more detailed then I could ever get in this series.
Once you have your chosen backtesting weapon (software), do the following:
- Write down your trading strategy in a notebook or in an online journal. Specifically write down:
- What pair you are testing (pick only one)
- What time frame you are trading on
- When you will enter
- Profit target
- When you will exit
- If you will scale in/out or take an all in/all out strategy.
- How much of your account you will risk per trade (should be less than 2%)
- Any risk to reward ratio requirements
- Anything else you can think of that might pertain…
- Then, test that exact strategy for as long a period as you can
- WARNING: There will be a big temptation to start experimenting with settings in the middle of the test. Don't do it! Stick with it until you run out of data or it is obvious that the strategy will not work…whichever comes first.
After that, figure out how you can improve the return (if possible). Maybe you can:
- Tighten the stop loss
- Take fewer trades
- Pay better attention to support/resistance levels
- Eliminate some indicators
- Look for a bigger profit target
You should test at least 1,000 trades under your belt before moving on to the next step.
Test the same pair again, if you have to. I tested 1,000+ trades, some of which I shared here. Once you are satisfied with the results of a strategy, it is time for…forward testing (that is the topic next week).
Here is how you can crush this step…
Yes, the back testing step is the hardest.
But what if you could join a friendly community of traders dedicated to testing and helping each other out? Check out this page to join my new community as soon as it is ready.
Click here for more information and instructions on how to join. This offer will end soon, so if you are interested, act soon because I will take the page down when all the spots are filled.
See you on Wednesday!
P.S. – If you have 5 seconds and are looking for a forex signal service, I just have one question to ask you. Thanks in advance!